“Yes” was given to me by one of my favorite angel investor / seed
VC’s to work with – John Greathouse of Rincon Venture
Partners and author of the blog InfoChachkie
that you should check out because it is filled with great info
from a guy who has been a very successful operator. Rincon
is part of the new breed of Seed Stage VCs and with the
leadership of Jim Andelman has charted out the most
authentic early-stage investment strategy in Southern California.
Any SoCal entrepreneur raising early-stage money should put
Rincon on their short list.

John gave me the book after I spoke at his entrepreneurship class
at UCSB. I was excited to read it because Robert Cialdini
had been a speaker at Google when my wife worked there and she
told me that many members of the senior management team at Google
had been raving about his work. I decided not to be
bothered by the cheesy title and to read it anyhow. You
should, too. (no, I don’t take affiliate commissions!)

The book is a layman’s guide to understanding how we as humans
make decisions and is underpinned by data-oriented studies to
prove his claims. He lists 6 principles of social influence
that I’d like to cover in a series of posts: authority, social
proof, reciprocity, commitment / consistency, scarcity and
liking.

Social proof is defined as “looking for others to guide our
decisions” and it can be both explicit and implicit. We all
want to think that we’re unique and original thinkers but we’re
far more guided by others than we think.

In the book he talks about movement over the past decade to get
us to reuse our towels more when we stay at hotels. It is
clearly a ploy by hotels to cut costs but it also benefits the
environment. No cookies for guessing which reason they use
to market to us. It turns out that more than 50% of us
reuse towels at least once during our stay at a hotel because it
appeals to our “commitment / consistency” value trait to want to
be respectful of the environment.

But Cialdini knew they could do better. He ran an
experiment in a hotel in which he polled people on whether or not
they reused towels during their stay and as expected just over
50% did. He then put signs in some of the hotel rooms that
said, “the majority of guests at this hotel reuse their towels at
least once during their stay.” 26% more people reused their
towels at least once during their stay when they had this sign
versus the standard sign. Classic social proof in decision
making.

He went one step further. He then put a sign saying,
“people who stayed in this exact room reused their towels at
least once during their stay.” This increased the number of
re-users to 33% above the control group. We want to do what
we believe others like us are doing.

While I feel that I tend to have a strong POV on many things I’ve
always been aware of the social proof impact on my decisions.

The very first thing I do when deciding which movie I want to see
next is check its rating on RottenTomatoes and if the film is North of 80% then
it’s a “no brainer” for me to go and see. If it’s below 50%
I will almost never go and see it. I suppose you could call
this “The Wisdom of the Crowds” (another great
book). If you haven’t read it you should definitely buy it
– other people just like you did

When I want to go to restaurants I check out Zagat and Yelp.
Before booking a hotel I always check out Trip Advisor and
read reviews. This is all explicit decision making.

So how does this apply to you?

First, no matter what anybody tells you (people don’t want to
believe that we’re influenced by the crowd), social proof is
hugely important in fund raising. Every angel, seed investor
or VC is influenced by who else is talking with you, who
else is investing in you and they (we) are all influenced by who introduced us
to you.

If you want to hear an entrepreneur talk about this topic
listen to Farb Nivi tell the story of how he
got Rob Lord to invest in Grockit and how that led to Reid
Hoffman and in turn Benchmark Capital, Integral and Atlas – more
than $15 million in total. He covers this is the first 15
minutes or so of the video and he’s awesome to listen to (more
than 25,000 people have listened to this video so far –
mostly entrepreneurs ;-))

Nowhere is social proof more prevalent than in angel investing.
As Fred points out in his post:

“Angels love to share deals with each other. It is how
angel rounds come together.”

Or put another way – angels look for social proof from other
angels. It’s hard for angels to assess whether or not to
invest because they often have day jobs and can’t commit to the
kind of due diligence that most VCs go through. Angels are
writing smaller checks so they typically don’t want the overhead
of complex analysis in order to make their decision.

So what you really need to get an angel round together are your
“anchor tenants.” These are the people who make the early
commitment to you to fund your round before having any
social proof. You should seek to get people who are
respected by others in your field and who will therefore make it
easier to raise the rest of your angel round.

In the video I linked to above Farb talks about how he got Rob
Lord on board at Grockit. He first worked hard to get him
to be an advisor to the company. From there Rob decided to
make a small investment. Often people don’t like to be the
only person writing a check so they’ll try to find safety in
numbers by investing other angels to look at the the deal and
“see what they think.” That’s social proof, too.

I was once thinking about writing a blog post called “Is Reid
Hoffman the Kevin Bacon of Silicon Valley” because it seemed that
every angel / seed investor I knew looking at deals was shopping
their deal to Reid and everybody wanted Reid’s opinion before
committing. Maybe a more apt title would have been “Is Reid
Hoffman the Yoda of Silicon Valley?” When I met recently
with Keith
Rabois of Slide he called Reid, “the smartest thinker in
consumer Internet in Silicon Valley.” Chris Dixon called Keith
(paraphrasing), “the new Reid Hoffman now that Reid works for
Greylock.” Social proof meets social proof meets social
proof.

But what is at play with Reid is another principle called
“authority.” Again, even though VCs are populated by
Stanford & Harvard MBAs who all seemed to graduate near the
tops of their classes – we’re all in search of authorities we
trust to help guide our decisions. Because I built two SaaS
companies and sold my second one to Salesforce.com (where I then
took on the role of VP Products) I am often asked to look at SaaS
and/or sales-oriented deals for others.

Whenever I see something in financial services I always ask my
partner Brian McLoughlin who has spent more than a
decade looking at Fin Services deals or I might send it through
to Mark Goines who is a phenomenal angel
investor (invested and on the board of Mint.com) and was previous
SVP at Intuit. Anything requiring lead generation and/or
customer acquisition I call Matt
Coffin. We all want authorities who are smarter on
specific topics than we are.

So you need to find anchor tenants who have authority in your
field and who are respected by other angel investors in order to
maximize the benefits of social proof.

Another successful strategy (in addition to bringing on people as
advisors) that I’ve often recommended to people who don’t have a
track record is to carve out a very small amount of seed
investment (say $50,000) and offer 5 people to invest at $10,000
each at a $500,000 post-money valuation (which means you give up
10% of your company for very little money. The key to this
strategy is getting 5 people who form the social proof to help
you get a bigger angel round done at a higher valuation by tons
of industry insiders and thus offering the social proof you need
attract great employees and ultimately venture capital investors.

Obviously I’m assuming that you have a great product and/or
strategy. Having the right angels in a round that is cheap
won’t help you succeed if your product or strategy sucks.
But assuming those are sound, strangely I have found over
the years that even the wealthiest people want to feel like “they
got a deal.” So if that is all it takes then it is a
rounding error to your future success. I’d far rather
dilute 10% early and get some investor traction than to wither
for another 3-6 months trying to get my seed round together.

And to echo what Fred Wilson said in his post about AngelList –
it is social proof on steroids. You often have to have your
anchor tenants before Nivi will send around your deal. The
emails we all get on the AngelList get say something like, “New
gaming platform invested in by Dave McClure, Chris Yeh and Jeff
Clavier. They’ve raised $200k and are looking for $500k in
total.”

As an investor it’s hard to not be influenced by an email like
that where you respect the early investors and at least want to
read about the company. So even if you’re not getting
funded by everybody you’re instantly on the who’s who radar of
the investment world. In a way, it’s even more precision
for the investment world that TechCrunch.

To finish with a quote from Fred,

“I am on AngelList. I see all the deals come together. I
don’t personally invest in angel deals in the web/tech space
because of potential conflict with USV down the road. But even
so, I find it immensely useful to see what companies are
getting traction in the angel market. It’s part of my
radar/early warning system.”

Authority + Social Proof + Traction in getting rounds done
quickly = perception that this is a company that should be on my
radar screen / I should pay attention to. So what are you
waiting for? Go get your anchors.

UPDATE: Just because I believe in the power of
social proof does not mean that I advocate being a lemming when
one makes an investment. I have always been and remain anti
conventional wisdom. In this post I’m merely pointing out
that people look for references from authority and knowing that
people are influenced by social proof should help people looking
to raise money. As someone investing – caveat emptor.

In my next post I’ll talk about using social proof in getting
customer traction.